Posted Oct 21, 2019 by Martin Armstrong
QUESTION: Would you please explain exactly what government debt is and who receives the interest payment that governments make on borrowings? I thought that Governments borrowed from their respective central banks and paid the central bank interest on the debt. I never understood why a government would have to pay any interest. My brother tells me that all government debt is made up of bonds and the interest payment goes to the bondholder
ANSWER: The interest paid on debt is to the bondholders, which includes foreign governments, Social Security, and private investors/institutions. The holdings of the debt change. Under Quantitative Easing, the bonds held by the central banks mean they receive the interest payments.
The French back in the 1960s had such a system where the central bank created the money and lent it to the government. That is a far better system because then the government does not compete with the private sector to borrow money thereby reducing economic growth.